Has the Fed Found the Data It Has Been Looking for to Justify a December Rate Hike?
The stock market continued to grind its way higher last week, even as it traded off following Friday’s substantially weaker than expected September Employment Report, which led the market to finish the week with a stubbed toe. Candidly, following the missed relative to expectations results from restaurant company Darden (DRI), we were bracing for a weaker than expected employment print and we were not disappointed.
We expect to see further hurricane reverberations this week in economic data and the earnings reports to be had. We talked about some of this on last week’s Cocktail Investing Podcast as well as reviewed the growing number of 2017 holiday shopping forecasts that favor online and mobile shopping. We see that as confirming not only for our Connected Society investing theme, but for our position in Amazon (AMZN) on the Tematica Investing Select List.
On the Economic Front
Following last week’s economic smorgasbord, which we recapped for your reading pleasure in Friday’s Weekly Wrap, the coming week sees a far slower pace of economic data. Make no mistake, while the number of reports is smaller week over week, there are still a few doozies to be had this week. These include the inflation bearing figures in the September PPI and CPI reports. Over the last few months, the PPI report has not sparked a sense of rising prices, and excluding the rise in gasoline prices the other components of the monthly CPI report echoed the PPI readings.
As we discussed in last week’s Cocktail Investing Podcast, “Inflationistas” were harping on the surge in Prices component of the September ISM Manufacturing Report and odds are we will some confirming data this week. As we shared, that month over month jump was likely due impact of the hurricane trifecta that hit during September, and is more likely than not going to be transitory in nature. That said, this could be the data the Fed has been looking for to justify its expected December rate hike.
We’re likely to see some disruption in the September Retail Sales as the impact of all three hurricanes is felt. September auto & truck sales moved sharply higher for the month at all manufacturers, and odds are Hurricane Irma means another strong month is to be had in October. We’re likely to see other retail categories “thrown a bone” as consumers replace what was lost or destroyed. However, given the state of the consumer (rising debt, tepid wage growth, and generally under saved) this near-term bump in retail sales is likely to be a pull-forward in demand plain and simple.
Inside the monthly Retail Sales report, we’ll be looking for evidence of the accelerating shift to digital shopping as we soon enter the 2017 holiday shopping season. On last week’s podcast, we recap the several 2017 holiday shopping forecasts that have been published, and discuss the growing influence of digital shopping, especially mobile shopping.
On the Earnings Front
The trickle of corporate earnings reports we saw last week picks up some this week, but it’s still small potatoes compared to what will be unleashed beginning next Monday (Oct. 16). Among the reports to be had, we’ll be digging into comments from Barracuda Networks (CUDA) on recent cyber attacks and what they mean for our Safety & Security theme. While Delta Air Lines (DAL) likely saw some hurricane disruption, it’s comments on international travel trends will be fodder for our Rise & Fall of the Middle Class investing theme.
As we mentioned above, last week we parsed the 2017 holiday shopping forecasts, but we’ll look for further insight from Cashless Consumption contender Blackhawk Networks (HAWK) this week. Amid conflicting September economic data that we discussed in Friday’s Weekly Wrap, we’ll look to comments and guidance from JB Hunt Transportation (JBHT) to get a clearer view on the true speed of the economy. Finally, comparing results at Del Frisco’s Restaurant (DFRG) with the recent Retail Sales reports should reveal the resiliency to be had with our Affordable Luxury theme.
Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:
Rise & Fall of the Middle Class
Nothing better than having an organization like Gallup issue confirming data for our Rise & Fall of the Middle-Class investing theme. While most tend to understandably focus on China and India given the size of their respective populations, Gallup's finding reminds us upward economic mobility is occurring in other emerging Asian economies. This target market expansion is poised to attract U.S. companies looking to offset waning growth in more mature economies that are contending with the falling middle-class as well as Cash-Strapped Consumer. Read More >>
We at Tematica have shared our view that Amazon (AMZN)is the innovator to watch as it continues to disrupt existing business models. Amazon is not always successful as evidenced by its flopping in the smartphone market, but like any true innovator they keep working at it and sometimes that means outflanking a competitor where they least expect it. Despite all the talk of Apple's (AAPL) CarPlay and Alphabet's (GOOGL) Android Auto, it's Amazon that continues to expand its footing in the automotive market with Alexa. As Alexa's reach is expanded from smart speakers by Amazon as well as third-party ones from Sonos, it is moving beyond that and penetrating the appliance and automotive markets with Apple and Alphabet yet to catch up. Once again, Amazon is out-innovating the disruptors, making Alexa an even stickier part of our lives with linkages to Nissan, BMW and others. Read More >>
Fattening of the Population
We have shared many a data point on the hidden costs associated with our Fattening of the Population investing theme. Recently the Center for Disease Control and Prevention reminded that us the vast majority of people do not realize the degree to which obesity and being overweight leads to cancer and other healthcare issues. We see this as proof positive of the pain point created by our Fattening of the Population theme, one that screams for solutions as simple adopting our Food with Integrity theme to ones that fit with our Disruptive Technology theme and the fountain of youth aspect of our Aging of the Population theme. We expect our Fattening of the Population theme to come to the forefront of the healthcare debate as people look to wrangle costs lower and adopt a more preventative posture to health issues. Read More >>
Here’s Why Bitcoin Won’t Replace Gold So Easily
What a week it was.
First and foremost, I’d like to acknowledge the horrific mass shooting that occurred in Las Vegas, the deadliest in modern American history. On behalf of everyone at U.S. Global Investors, I extend my sincerest and most heartfelt condolences to the victims and their families.
The memory of the shooting was still fresh in people’s minds during last Tuesday’s Hollywood premiere of Blade Runner 2049, which nixed the usual red carpet and other glitz in light of the tragedy. Before the film, producers shared poignant words, saying that in times such as these, the arts are crucial now more than ever.
I had the distinct privilege to attend the premiere. My good friend Frank Giustra, whose production company Thunderbird Entertainment owns a stake in the Blade Runner franchise, was kind enough to invite me along. Despite the somber mood—a pivotal scene in the film even takes place in an irradiated Las Vegas—I thought Blade Runner 2049 was spectacular. Even if you’re not a fan of the original 1982 film, it’s still worth experiencing in theaters. Hans Zimmer and Benjamin Wallfisch’s synth-heavy score is especially haunting.
CNET recently published an interesting piece examining the accuracy of future tech as depicted in the original Blade Runner, from androids to flying cars to off-world travel read the article here.
Still in the Early Innings of Cryptocurrencies
Speaking of the future, I spoke on the topic of the blockchain last week at the Subscriber Investment Summit in Vancouver. My presentation focused on the future of mining—not just of gold and precious metals but also cryptocurrencies.
Believe it or not, there are upwards of 2,100 digital currencies being traded in the world right now, with a combined market cap of nearly $150 billion, according to Coinranking.com.
Obviously not all of these cryptos will survive. We’re still in the early innings. Last month I compared this exciting new digital world to the earliest days of the dotcom era, and just as there were winners and losers then, so too will there be winners and losers today. Although bitcoin and Ethereum appear to be the frontrunners right now, recall that only 20 years ago AOL and Yahoo! were poised to dominate the internet. How times have changed!
It will be interesting to see which coins emerge as the “Amazon” and “Google” of cryptocurrencies.
For now, Ethereum has some huge backers. The Enterprise Ethereum Alliance (EEA), according to its website, seeks to “learn from and build upon the only smart contract supporting blockchain currently running in real-world production—Ethereum.” The EEA includes several big-name financial and tech firms such as Credit Suisse, Intel, Microsoft and JPMorgan Chase, whose own CEO, Jamie Dimon, knocked cryptos a couple of weeks ago.
To learn more about the blockchain and cryptocurrencies, watch this engaging two-minute video.
Will Bitcoin Replace Gold?
Lately I’ve been seeing more and more headlines asking whether cryptos are “killing” gold. Would the gold price be higher today if massive amounts of money weren’t flowing into bitcoin? Both assets, after all, are sometimes favored as safe havens. They’re decentralized and accepted all over the world, 24 hours a day. Transactions are anonymous. Supply is limited.
But I don’t think for a second that cryptocurrencies will ever replace gold, for a number of reasons. For one, cryptos are strictly forms of currency, whereas gold has many other time-tested applications, from jewelry to dentistry to electronics.
Unlike cryptos, gold doesn’t require electricity to trade. This makes it especially useful in situations such as hurricane-ravished Puerto Rico, where 95 percent of people are reportedly still without power. Right now the island’s economy is cash-only. If you have gold jewelry or coins, they can be converted into cash—all without electricity or WiFi.
Finally, gold remains one of the most liquid assets, traded daily in well-established exchanges all around the globe. Every day, some £13.8 billion, or $18 billion, worth of physical gold are traded in London alone, according to the London Bullion Market Association (LBMA). The cryptocurrency market, although expanding rapidly, is not quite there yet.
I will admit, though, that bitcoin is energizing some investors, especially millennials, in ways that gold might have a hard time doing. The proof is all over the internet. You can find a number of TED Talks on bitcoin, cryptocurrencies and the blockchain, but to my knowledge, none is available on gold investing. YouTube is likewise bursting at the seams with videos on cryptos.
Bitcoin is up 350 percent for the year, Ethereum an unbelievable 3,600 percent. Gold, meanwhile, is up around 10 percent. Producers, as measured by the NYSE Arca Gold Miners Index, have gained 11.5 percent in 2017, 23 percent since its 52-week low in December 2016.
Look Past the Negativity to Find the Good News
The news is filled with negative headlines, and sometimes it’s challenging to stay positive. Take Friday’s jobs report. It showed that the U.S. lost 33,000 jobs in September, the first month in seven years that this happened. A weak report was expected because of Hurricane Irma, but no one could have guessed the losses would be this deep.
The jobs report wasn’t all bad news, however. For one, the decline is very likely temporary. Beyond that, a record 4.88 million Americans who were previously sitting out of the labor force found work last month. This helped the unemployment rate fall to 4.2 percent, a 16-year low.
There’s more that supports a stronger U.S. economy. As I shared with you last week, the Manufacturing ISM Purchasing Managers’ Index (PMI) rose to a 13-year high in September, indicating rapid expansion in the manufacturing industry. Factory orders were up during the month. Auto sales were up. Oil has stayed in the relatively low $50-a-barrel range, which is good for transportation and industrials, especially airlines. Small-cap stocks, as measured by the Russell 2000 Index, continue to climb above their 50-day and 200-day moving averages as excitement over tax reform intensifies.
These are among the reasons why I remain bullish.
One final note: Speaking on tax reform, Warren Buffett told CNBC last week that he’s waiting to sell assets until he knows the plan will go through. “I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million,” he said.
It’s a fair comment, and I imagine other like-minded, forward-thinking investors, buyers and sellers will also wait to make huge transactions if they can help it. Tax reform isn’t a done deal, but I think it has a much better chance of being signed into law than a health care overhaul.
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